Many small and medium sized companies that engage in OEM\rmanufacturing/outsourcing in China fail to take the steps necessary to\rprotect themselves. When problems arise, they can do little or nothing to\rprotect themselves because they have no legal basis for protection. The fact is that outsourcing disputes must be resolved in China, under the Chinese legal system. The Chinese legal system has improved greatly over the past ten years and taking\ra few basic legal steps can greatly reduce your risk. The cost of such\rprotection is modest compared to the protection it will provide.

The following five basic steps will greatly reduce your problems with\rChinese manufacturers, while improving your chances of recovering should any\rproblems arise.

1. Create and properly register your intellectual property rights in\rthe United States. If you do not have a firm basis for your IP rights under\rU.S. law, you will have nothing to protect in China. Before you go to\rChina, be sure your intellectual property is protected under U.S. law.\rProtect your brand identity by creating and registering your trademark,\rslogan and logo with the U.S. Patent and Trademark Office. Register your\rimportant copyrights with the U.S. Copyright Office. Carefully identify and\rprotect your trade secrets, proprietary information and know how.

2. Register your trademarks in China. Registration can protect your\rfuture access to the Chinese market, prevent the export of counterfeit goods\rfrom China, and prevent a competitor from registering your mark in China,\rwhich would prohibit you from exporting your own product from China.

3. Use a written agreement to protect your know how and trade secrets\rin China. Small and medium companies usually do not have an extensive\rportfolio of patents. Their most valuable intangible assets typically are\rtheir know how and trade secrets, which cannot be protected by formal\rregistration. Chinese law, however, permits companies to contractually\rprotect their know how and trade secrets by contract. Such agreements may also address issues such as non-competition and confidentiality. Without such a written\ragreement, no such protection is available.

4. Product Quality and Payment Terms. The rule here is simple. Do not\rmake final payment to your Chinese manufacturer until you are confident you\rwill be getting an on time shipment of the correct items and quantities at\rthe quality standards you require. This usually means you must incur \rinspection costs in China and provide for a clear procedure\rfor dealing with these problems as they arise. You must take the lead on\rthis. You cannot depend on the OEM manufacturer to do this for you.

5. Use comprehensive OEM Agreements with each manufacturer. Small and\rmedium sized businesses often enter into OEM manufacturing transactions with\ra simple purchase order. This is a mistake. The purchase order will protect\rthe Chinese manufacturer, not you. Your protection depends on your securing\ra written OEM manufacturing agreement with each Chinese manufacturer with\rwhich you deal. The ideal OEM agreement will address all of the issues\rdiscussed above while also addressing other basic legal issues such as\rjurisdiction and dispute resolution. This agreement should be in both Chinese\rand English, since the Chinese language version will control in China.

Steve Dickinson is an attorney with the international law firm of Harris & Moure (http://www.harrismoure.com), where he focuses on assisting small and medium sized businesses in or involved with China. Steve is fluent in mandarin Chinese and has been working on China matters for more than twenty years. He can be reached at firm@harrismoure.com.